Filing An Embezzlement Case At The DA’s Office Can Be Tricky
September 25, 2006
By Juan Cobian
Workplace fraud is a $652 billion problem in the United States, representing 6 percent of gross domestic product, according to The Association of Certified Fraud Examiners (ACFE).
Some business CEOs think that fraud only happens at large companies, but they're wrong. More than a third of all frauds happen at businesses with fewer than 100 employees, according to the ACFE report. They're often susceptible because too much authority is vested in one or a few people. The typical loss is $190,000.
It is estimated that 30% of business failures are directly related to employee theft.
The following is a current case file in our Criminal Investigation Division. Only the names have been changed:
Jane Doe was a long-term Accounting employee of a consumer electronics firm in Los Angeles.
In her, ABC Company thought they had a loyal, honest, experienced employee.
Although lacking a formal education, she was well-rounded; originally hired as an Accounts Receivables Clerk, her most recent position required her to oversee the accounting department's petty cash funds. Jane was responsible for immediately depositing all cash in excess of $3,150.00, the maximum allowable "cash on hand," into her employer's bank account.
Jane's responsibilities entailed receiving cash, paying for miscellaneous expenses out of the petty cash fund and documenting the cash coming in and going out. She also prepared a cash schedule at the end of each month for her supervisor, who posted cash entries into the company's computerized accounting system, based on Jane's hand-written cash schedule.
The primary source of the cash handled by Jane came from the company's Distribution Center (DC). Customers, some of whom were employees, paid for merchandise, parts, and miscellaneous services inside the distribution center and, although only a small percentage of the company's sales were cash transactions, every week DC employees hand-delivered to Jane an average of $1,000 cash, inside envelopes.
Along with the cash, these DC employees handed Jane copies of a form indicating the amount being delivered to Jane. These forms were signed by the DC employees, but Jane was not required to give the DC employee any documentation (receipt) in return, nor was there any other employee required to verify the cash exchange.
One day, Jane's supervisor reviewed an end of the month cash reportsubmitted by Jane. The report consisted of customer's names, invoice numbers, and method of payment. This indicated the cash paid by the customers. The total cash balance was then indicated, and all funds in excess of $3,150 were supposed to have been deposited to the bank.
Jane's supervisor discovered that Jane's reported total did not balance the sum of all the entries on her end of the month cash report; there was an eight- cent discrepancy. Normally, this would have been sent back for Jane to correct. However, Jane was absent on that particular day and was, therefore, unable to correct the simple 8-cent error.
Jane's supervisor totaled the cash listed on the report again, but it did not match the total Jane had shown on the report - - - not even closely.
Since Jane was absent and Jane's supervisor wanted to be sure she posted the correct amount into the company's computerized accounting system, using the bank's online banking system, the supervisor then turned to the company's online banking records and looked for the deposits correlated with Jane's reports.
She discovered, much to her surprise, that cash deposits had not been made in several months. Was this a mistake? Jane's supervisor subsequently contacted a bank representative and checked to see whether the deposits were accidentally posted under any of the company's other numerous accounts.
There were no such deposits.
Sensing something was certainly wrong, Jane's supervisor notified the Controller, who launched an immediate investigation. After close review of the company's cash records, Jane's files, accounting entries, and Jane's computer, the company discovered Jane had embezzled over $150,000 in cash from the company over the course of the past four years.
How could this have happened? How could a low-level accounting clerk get away with stealing over $150,000? Were other employees involved?
It was determined Jane acted alone in stealing cash from her employer.
It happened, in short, because there was little or no separation of duties, and supervision was inadequate.
- Jane received the cash.
- She prepared a cash schedule based on what she received; otherwise collection calls would be made to the company's customers who paid in cash, which would have certainly lead to the company questioning Jane.
- She was solely responsible for overseeing six separate accounts.
- Although not among her job duties any more, she was familiar with and had the ability to make entries into her employer's accounts receivables system.
- She was responsible for making the cash deposits.
- Finally, no one verified that the cash reported on her cash schedule was actually deposited into her employer's bank account, nor did anyone look over the accounts for which Jane was solely responsible. In the big picture, they seemed insignificant. Little did they know a small amount of money trickling away monthly would add up to more than $150,000.00 from this "inconsequential" source of company funds.
Based on Jane's handwritten monthly cash schedule, her supervisor debited (increased) cash and credited (decreased) accounts receivables. This created a problem for Jane because, at the end of the month, total cash would be compared to actual cash on hand and there would be a discrepancy. Therefore, in the six accounts for which Jane was solely responsible, she posted a credit (decrease) in cash and debited (increased) accounts receivables so that the total cash amount the company had on hand reflected the company's accounting system's total. In other words, the computerized credits and debits Jane made to the accounts she managed, perfectly reflected the cash amounts she stole.
Now the company knew exactly what happened, how it happened, and how much was stolen. What were they to do now? This was new territory for them, having never dealt with embezzlement before. They decided to terminate Jane and seek prosecution.
When Jane returned to work, the Chief Financial Officer (CFO), the Controller, and the Human Resources Manager confronted Jane.
Jane said she was having financial problems and had "borrowed" an amount of money (much less than the investigation had discovered was actually stolen). Jane was quickly terminated for misappropriating the company's cash and asked to provide a written statement describing her actions; she was allowed to write this statement at home.
A couple of days later, the CFO, Controller, and Human Resources Manager met with Jane at a local restaurant for a pre-arranged meeting. Instead of talking with them, Jane handed the CFO an envelope and walked away. The letter inside explained she "borrowed" money from ABC Company and it touched on how she managed to conceal her activities from the company, but most of the letter was about her trials and tribulations. Furthermore, the letter was typed not signed.
ABC Company subsequently made copies of all accounting records pertaining to this investigation. They prepared a synopsis of Jane's actions and submitted it to local law enforcement, along with a month's worth of backup.
The Detective handling the case instilled confidence in the company, assuring ABC executives that Jane would be tried and convicted of a Felony for the grand theft of company funds.
The Detective initially filed the case as three crime types: Falsification of Records, Grand Theft, and Embezzlement, California penal codes 471, 487, and 506.
The Detective subsequently interviewed Jane. In the meeting, which was videotaped, Jane admitted to misappropriating company funds. The Detective subsequently updated ABC Company and informed them he had turned the case over to the District Attorney.
Weeks passed and after neglecting to return several of ABC Company's calls, the Detective called ABC Company's Human Resources Manager and said he had bad news. The District Attorney had rejected the case.
Jane Doe was, by then, happily working at another firm, busy handling their accounting and controlling their petty cash. She assumed she had gotten away with stealing from ABC. So had ABC Company's executives.
What went wrong? ABC Company thought it was obvious Jane embezzled company funds.
Before we analyze the information submitted to the Detective, it is important to note many Detectives and other Law Enforcement personnel do not have financial backgrounds and many more are extremely busy and have very little time to dedicate to each case.
There were three basic "fatal" faults with the case file submitted against Jane Doe:
- It had unnecessary information. It included steps subsequently taken by the company, as a result of Jane's actions, to avoid such thefts in the future. The summary report included job performance reviews from Jane's personnel file which elaborated on Jane's glowing good work. It unnecessarily showed the company's other deposit records for the same month -- over $3,000,000 in checks deposited. These superfluous facts can be highly and prejudicially favorable to the defense when shown to a jury.
- The case file only included one month's worth of financial backupwhich happened to have been for the then-current month, in which Jane was terminated. Because the theft was caught during that month, the record had been corrected before having been sent to the police, so that proper entries were made to the company's computerized accounting system. Therefore, the backup for that month did not accurately display the loss of funds.
- There was no proper history of the case summarized for the D.A.,because the company simply relied upon the police detective to write such a summary. Although there was a summary of what Jane had done, it was written confusingly and did not include backup documentation. Without an accounting background, the detective made numerous errors in describing the case to the DA. When it didn't make good sense to the filing District Attorney, she rejected it.
Disturbed by the thought of Jane getting away with stealing over $150,000, ABC Company asked a reputable labor employment lawyer for advice. On his recommendation, they contacted our investigation firm a full nine months after discovering they were the victims of theft and eight months after the case had been labeled "D.A. REJECT" at police headquarters.
After meeting with ABC Company's executives and reviewing the case file as submitted by the Detective, our investigators immediately understood why the District Attorney had turned down the case. Police have little time to dedicate to really understanding complicated cases, deciphering them and articulating them to the DA. His report was abysmal.
ABC Company contracted with us and gave us the case to see if we could get Jane Doe prosecuted. Here's what we did:
- First, we organized all backup information in simple-to-understand, layman's language, numerically and alphabetically tabbed for easy reference; then,
- we deleted all unnecessary information from the case file
- We included one full year's worth of accounting backup, and
- prepared an "easy to understand" report which, step-by-step, chronologically revealed how the money was received by ABC Company, delivered to Jane, and how she falsely reported the deposits. We included the tabbed references to copies of her many fraudulent cash reconciliation entries. Finally, the case file included
- ancillary information, including the letter she handed ABC Company in which she stated she simply "borrowed" the money.
After calling the detective, and explaining to him how we had researched, revived, and re-packaged the felony case against Jane Doe, we met with the detective and handed him our turn-key, formally prepared case file, ready for presentation to the DA.
The Detective took the new package to the DA where it was immediately accepted and filed.
The next day, arrest warrant in hand, he again met with Jane Doe. This time, she was arrested and booked on felonies.
Soon, Jane Doe will be in court for her first criminal hearing. As she awaits trial now, there is no doubt Jane Doe will be successfully convicted of a Felony.
By our recommendations, the company has now separated most of the cash-handling duties within their accounting department, and has implemented additional managerial control of the cash. This will certainly help prevent additional fraud in the future.
They also feel better knowing Jane Doe will have to "face the music" for four years of unbridled theft.
About the Author:
Juan Cobian is a Corporate Investigator and Case Manager at Diversified Risk Management Inc., Los Angeles, a full-service investigation firm where he co-manages the Undercover Investigations Division. DRM is a licensed investigation and risk mitigation consulting firm with many years of experience in conducting workplace investigations. The firm offers a broad range of specialized risk management and investigation services that are designed to control loss and minimize exposure by providing innovative and strategic business solutions. DRM, Inc. assists corporations, non-profit organizations and law firms in identifying, mitigating, and responding to risks through a comprehensive and integrated suite of professional service offerings. For more information you are invited to visit our website atwww.DiversifiedRiskManagement.com or contact us at (800) 810-9508. You may also comment by email.